Ignore Politics, Innovation is Driving Healthcare Stocks

US politics casts a shadow on the healthcare sector in the short-term, but ageing populations and innovative new treatments are trends that are here to stay

James Gard 24 September, 2019 | 9:45AM
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As campaigning begins for the 2020 US election, the cost of healthcare is a live and emotive campaign issues. Consumers in the world’s biggest healthcare market think they are paying too much for drugs and politicians are hoping to get elected on promises to regulate the market.

This can only put pressure on the profits of the largest companies such as Pfizer and is already starting to weigh on their share prices. But long-term trends such as ageing populations are more supportive of investing in healthcare, biotech and pharmaceutical stocks and the funds that own them. This, alongside a growing consumer class in Asia, can only will drive up demand for healthcare products, from heart rate monitors to insurance.

Cutting-edge technology is driving innovation in the sector and small biotech firms are attracting venture capital funding on the same scale as US tech unicorns. Some of the new treatments on offer are life-changing: CAR-T therapy, for example, uses a patient’s own immune system to fight cancer cells. Scientists are wary of saying they have “cured” blood cancer, but patients who would previously have died are now surviving for many years.

Still, while private companies are spending billions on research and development (R&D), governments the world over are struggling to cope with the strain on healthcare budgets. “We’ve got to deliver more healthcare to more people for less money,” says Daniel Mahony, who oversees Polar Capital’s healthcare strategy, which includes an investment trust and an open-ended fund.

10-Year Growth of Biotech/Healthcare Funds (%)

Biotech funds

Science Fiction Becomes a Reality

The realm of healthcare has many examples of technology transforming people’s lives, from a gel that can regenerate a heart after a heart attack, to drones delivering insulin to diabetes patients in remote locations. Robots are helping perform operations such as keyhole surgery, speeding up the process and improving the odds of patient making a full recovery.

Genome sequencing is one area of rapid progress, says Linden Thomson, who manages the Axa Framlington Biotech fund, and has immeasurably improved scientists’ understanding of how diseases work and how companies develop drugs. EdenTree’s Lydia Greasley, an investment analyst, agrees, arguing that genome sequencing allows earlier detection of diseases, which helps improve patient’s life expectancy – and also keeps costs down for companies.

Thomson and Mahoney are also excited by the opportunities offered by CAR-T therapy, which uses a patient’s immune to system to detect and kills blood cancer cells. Swiss drug giant, Novartis, the largest holding on the Polar Capital Healthcare Trust (PCGH), launched the first FDA-approved CAR-T therapy, Kymriah. The treatment currently costs around $500,000 as a one-off.

Polar Capital’s Mahony says the prohibitively high costs of these treatments make them hard to justify for public healthcare systems like the NHS; the challenge for providers is to knock the cost down in the coming years. He says the healthcare market could become divided into basic, technology-driven “wellness” programmes that prevent major illnesses, and expensive therapies for very sick people. “You want to keep consumers healthy and give patients medicine,” he says. Something like Kymriah is far beyond the “pill a day” model of the pharma industry of yesteryear; these treatments are a “quasi-service”, he adds, needing specialist equipment and clinics, meaning they will always be able to command a premium price.

Mahony believes that consumers are driving technological changes to the healthcare market. One area where the smartphone revolution has intersected with healthcare is in ECG monitors. US company Alivecor has a product called the Kardiamobile, which costs $99 and links to an iPhone – it monitors your heart rhythms and sends any worrying data to a doctor.

More than 50% of Polar Capital Healthcare trust is in healthcare equipment where much of this “medtech” innovation is occurring.

US Politicians Target Drug Prices

But the short-term risks to the US healthcare market cannot be underplayed, says Thomson. While it’s unlikely that the US will embrace the NHS-style system proposed by Democrat candidates Bernie Sanders and Elizabeth Warren, change is coming to the US healthcare market – and, crucially, that will alter how much drug companies can charge for products.

Drug pricing is a topic that routinely arises in the run-up to a US election; in 2016, it was Democrat candidate Hillary Clinton vowing to go to war on the industry. Unlike in the UK, where prescriptions mean we have a fixed price for drugs, in the US the price of medication is uncapped. It means consumers could pay hundreds or even thousands of dollars for a simple drug. 

As politicians realise the severity of the problem, Polar Capital’s Mahony says the industry, despite spending billions on lobbying, is a pariah in Washington, something akin to the tobacco lobby twenty years ago.

This month, Nanci Pelosi, the House speaker and potential Democrat President, proposed new plans to lower the cost of prescription drugs, a policy her opposite number called “socialist price controls”. In a rare moment of unity in US politics, President Trump agrees that ordinary Americans are being overcharged; he has pledged to negotiate hard on pricing if he gets a second term.

One more radical proposal is an “international drug price index”, where the price of a drug in US could be benchmarked off cheaper European drugs, which could hit company profits. But it's hard to separate the proposals from the politics, says Axa Framlington’s Thomson, who points out that the more extreme plans may not come to pass. A “Medicare for all” system as proposed by Sanders/Warren would smash a hole in drug companies’ business models, reducing their pricing power to “essentially zero”, for example, says Thomson.

She thinks a Trump re-election could lead to a relief rally for some of these shares – at least the European healthcare-for-all model would be ruled out, even if some price controls do come in. Polar Capital’s Mahony thinks reform of drug pricing could happen after the election, whichever party gets in, even if the international drug price index doesn’t.

Rated Funds

While funds in the sector are not usually owned by investors as core holdings, the growing importance of healthcare is becoming hard to ignore as a global theme.

Looking across the UK fund universe, investment trusts in the sector are highly rated: Biotech Growth (BIOG) and Worldwide Health Care Trust (WWH) are both rated as Silver by Morningstar analysts. The Biotech growth trust holds similar names to the Axa Framlington Biotech such as US companies Gilead and Amgen, which are listed on tech index Nasdaq.

Morningstar analyst David Holder says of the trust: “Recent underperformance does not dent our long-term conviction in the Biotech Growth Trust, and the strategy remains a strong option for those investors seeking long term and dedicated exposure to this niche area. The combination of deep clinical understanding of scientific developments via a large specialist resource, together with a solid process, makes for an excellent offering.”

Investors wishing to go down the direct route could look at world-class UK companies GlaxoSmithKline (GSK) – which has recently joined forces in consumer healthcare with Pfizer – and AstraZeneca (AZN), which is making inroads in the still developing Chinese healthcare market.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

James Gard

James Gard  is senior editor for Morningstar.co.uk


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